Jill Kerby

DO YOU NEED TO MAKE A NEW WILL?  ME TOO

As regular readers of this column know, I’m a great believer in having a financial plan and in reviewing that plan, especially when life events happen, like 

-       a first job (this is when the first plan should be constructed); 

-       marriage/partnership;

-       buying a home;

-       the birth of children;

-       post children middle age

-       retirement

-       advanced old age.

Here in Ireland, additional financial reviews may be necessary due to unemployment, emigration, divorce and even insolvency.

This summer my husband officially retired and we’ve undertaken a pretty comprehensive review, the first one in about a dozen years.  Back then with a sizeable payoff in his pocket, we had an opportunity to clear our debts and use freed-up cash flow to invest – mostly into our pensions. At 61, he’s now enjoying the benefits of that decision.

But part of the process of reviewing our finances has also involved reviewing our wills, which we haven’t adjusted since The Child was very little. That will included the naming of guardians and a discretionary trust. (He’ll be 21 in a couple of months.)

Now that he is nearly independent (but still in full-time education) we are looking at other tax-efficient and appropriate inheritance options…just in case:

-       Do we write simple wills that leave our individual or half share assets like our family home and joint savings to each other, with or without a smaller endowment to The Child?  This means any final inheritance will come from the surviving parent.

-       Do we make our wills as above, but add the provision of a discretionary trust in the event that we die together? The trust would limit The Child’s access to the capital money until he is older but also the immediate tax liability. It could continue to fund his third level education, pay his rent, etc.

-       Do we only leave him an inheritance equal to the current tax-free parent/child threshold of €225,000 between a child and parent (Category 1) and distribute the rest of our estate to other relatives, friends, charities?

-       Or, in the event we die together, do we just leave the bulk of our estate to him, (with bequests to others) but cover the potential inheritance tax bill by taking out what is known as a Section 72 insurance policy. (These policies are not cheap, but the proceeds are themselves, tax-free.)

What I’ve just described is certainly a “first world problem” that only applies to people who’ve accumulated assets – property, savings, pension funds.

However, in Ireland, and especially in Dublin where property prices are quickly rising, a family home can easily absorb the entire €225,000 tax free threshold if you only have one child.

It should be noted that a family home can be exempted from the inheritance tax equation if a child(ren) live with the disponer (the parent in this case) for three continuous years before they inherit. They cannot own property of their own and cannot sell the property for six years after the inheritance.

That said, we don’t expect The Child to live with us indefinitely, so the other options are being considered to both keep his tax bill as low as possible and achieve the most appropriate arrangement.

I’ve spoken to a number of financial advisers over the years about how much young people should inherit for their own good.

Nearly every one of them has reservations about the inheritance of large amounts of unearned wealth, or even the expectation of such wealth and how it might influence a young person from completing their education, finding a job or pursuing a career. The wrong outcome – a lot of wild spending - is sometimes described as the ‘Porsche syndrome’.

Making provision for children when they are very young, they say, is relatively easy: you aim to leave enough money to the surviving spouse or guardians to support the children financially until they reach young adulthood.

Making provision for adult children when you hit your advanced years and have consumed most of your wealth is also pretty easy: they’ll get what’s left over.

For (older) parents of a single young adult like us, however, who want to keep as many of the financial i’s dotted and the t’s crossed, how much unearned wealth should be passed on (after the government take their generous stake) is worth trying to get right. 

Financial reviews and will-making go hand in hand and it’s a process by which good financial and tax advisers come into their own.

We haven’t completed the process yet.  We might undertake it at least once more, but for now our succession and inheritance issues will be sorted out and I, can tick another financial box that represents, for me at least…peace of mind.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.